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Kenya Hoping to Export Oil, Despite Global Downturn

When Uganda and Total appeared to scuttle the deal for a joint Kenya-Uganda pipeline citing security concerns in October 2015, Kenya pledged that it would execute the plan alone if necessary. The January 5th 2016 announcement by Robert Godec, U.S. Ambassador to Kenya, that Washington would assist in raising the $18 billion to build the pipeline from the oil fields to the coast in Lamu was a strong public statement to Uganda of the Kenyan government’s seriousness to win the race to become the first East African oil exporter.

Press quotes Ambassador Godec as saying “Kenya needs $18 billion worth of financing, [for the construction of the pipeline] so one of the questions we are discussing is how we can work together with the private sector and governments to raise that sum, to find ways to make certain that this financing become available.”

The eye popping number – $18 billion – suggests that the U.S. will seek to play a role in financing not just the pipeline, estimated at $4.5 billion, but also other energy sector projects. The pipeline is the anchor feature in LAPPSSET, a massive regional integration project that includes a port, power plant and oil refinery at Lamu, a crude pipeline from Southern Sudan and a highway to Ethiopia. Related: Saudi Aramco IPO More About Geopolitics Than Finance

The announcement also suggests a broadening of the initiatives that PowerAfrica – the Obama Administration’s signature Africa initiative – will undertake. PowerAfrica focuses on eliminating bottlenecks that hinder power projects deals being brought to close. The initiative provides expertise to assist African governments in transaction-specific areas in support of negotiations with partners.

For example, if negotiations between a government and private developer have stalled because of the absence of a power purchase agreement (PPA), PowerAfrica can provide experts who can help the parties hash out a PPA. Remarks by Ambassador Godec and Mr.Keter, Kenya’s Energy Cabinet Secretary, suggest that PowerAfrica may expand its role in Kenya to the oil sector. According to media coverage, “Mr Keter said a technical team comprising Energy ministry experts and the American government’s PowerAfrica initiative side will work out details of the pipeline and electricity generation ventures.”

Kenya is impatient at the perceived slowness in bringing its oil to market since Tullow Oil’s discoveries in Lokichar. Energy Cabinet Secretary Keter is quoted as saying “Commercially viable oil reserves were discovered in 2012 but to date nothing has happened which makes Kenyans wonder what happened. We are confident that the PowerAfrica initiative will help us realize our pledge to Kenyans.” Kenya hopes the U.S. will help “….fast track this project so that we join the many countries who are exporters of oil, and so that we can lower the cost of fuel in the country” Keter told reporters. Related: Forget $20 - Oil Prices At $8 Per Barrel In Canada

December 2015 media reports in Kenya indicate that a State House team will report to the President at the end of January 2016 on the modalities necessary for Kenya to become an oil exporter by September 2016.

Plans are to transport crude by truck and railway to the export terminal in Mombassa. “The team has been asked to work on the report expeditiously as the thinking in government circles is that Kenya has to start producing oil,” The East African quotes a confidential source. Energy Cabinet Secretary Keter is tasked with delivering on this goal as one of his priorities.

Kenya’s impatience with the pace of oil pipeline development will run smack into the current realities of the global oil market and the difficulties inherent in the project. Kenya’s heavy, waxy crude, which requires a heated pipeline, is 850KM from the proposed port in Lamu.

Further complicating things, the required heated pipeline, the longest in the world, will pass through environmentally-sensitive areas. Tullow Oil, in its 2015 Half Yearly Report, indicated first oil will be three and a half years after project sanction which is expected at the end of 2016. This puts first oil in 2020 at the earliest. Related: Saudi Arabia: A Weak Kingdom On Its Knees?

Mr. Keter, Kenya’s Energy Cabinet Secretary, indicated that the U.S. EX-IM Bank will assist in raising financing for the pipeline. EX-IM’s due diligence will come up against the same set of micro- and macro-economic facts that Kenyan officials appear impatient about – oil projects are expensive, complex and can take a long time.

With the world awash in oil and crude prices flirting with $30/barrel, Kenya appears undaunted by any challenge to find takers for its oil. Its proximity to Asia, with refineries ready to handle heavy crude, is in its favor. It’s possible that Kenya’s announcements will spur Uganda to make a decision about whether it will pursue the joint pipeline with Kenya, or go it alone. But East Africa’s largest economy, happy to share joint-first East- African-oil-exporter acclaim with its neighbour, is not keen to be a runner up.

In 2013, Bloomberg quoted Martin Heya, Kenyan Petroleum Commissioner saying “Uganda drilled a long time ago, but it’s possible that we can produce earlier than anybody else. We shall be happy.” The world might have one new oil exporting nation by the end of 2016.

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